One of my small business clients once overlooked the Section 179 deduction, which allows businesses to deduct the full purchase price of qualifying equipment and software. During our review, I identified that they had made substantial equipment purchases that year. By leveraging this deduction, we significantly reduced their taxable income, resulting in substantial tax savings. This not only improved their immediate cash flow but also allowed them to reinvest in their business. It was a clear example of how a well-identified tax deduction can have a major positive impact on a client's financial health.
Travel! Most people don't know this but if you can balance your travel with both business and personal use, you can maximize your travel write-offs, lower your taxable income, and therefore lower your tax bill. Unlike some of the more aggressive write-offs the internet likes to tout (real estate cost segregation studies, buying cars you don't need, hiring private chefs for your family, etc.), travel is something you're already doing but when done correctly, it can help lower your taxes if done better. “If a trip is primarily for business, a taxpayer may fully deduct transportation expenses for travel even if that combines business and personal activities” (emphasis added). IRS Reg. 1.162-2(b)(1). See also Habeeb v. Commissioner, T.C. Memo. 1976-259, aff’d, 559 F.2d 435 (5 Cir. 1977). Examples: attending a conference, meeting, etc. while on an otherwise personal vacation could be great ways to suffice the 4-hour rule and enjoy a few margaritas afterward! Say for example you travel on Monday from Florida to California. Tuesday, Wednesday, and Thursday, you attend 2-hour conferences per day and squeeze in another 2 hours per day of SEO work/online meetings. Then Friday, you fly from California back to Florida. Monday and Friday are your 'transportation days', meaning that they're ordinary/necessary in getting to where you need to be in order to do business Tuesday-Thursday. As long as the business trip satisfies the overnight rule (i.e. you need to stay overnight to perform the business duties), the transportation days are deductible even though you may not have had meetings/worked 4 hours those days. With this example, all 5 days of travel are deductible! (airfare, lodging, meals, rental cars/ubers, trains/tolls, etc.) Please note however that meals are still only deductible at 50% and entertainment is still no longer deductible. Additionally, if the working hours requirement is not fully met and/or certain expenses are mostly personal, a proration between business and personal expenses may need to be done to properly allocate the write-off.
Accredited enrolled agent (EA), founder and President at Taxes for Expats
Answered 2 years ago
One of our clients, who owns a marketing agency, approached us to help maximize her tax deduction for her home office. She had been using a simplified method of $5 per square foot, resulting in a total deduction of $750. This method was convenient for her as she managed her business taxes independently. Despite the convenience of the simplified method, using the actual expense method to calculate the home-office deduction was a better choice for her to lower her taxable income. This method entails estimating the expenses associated with the home office, including a percentage of mortgage interest, utilities, home insurance, and repairs. The client’s annual home expenses were relatively high – approximately $25,000. With the office occupying 10% of her home, she could deduct $2,500 (10% of $25,000), thus reducing her taxable income by this sum. For our client, being in the 24% tax bracket, the actual expense method saved her $600 on her federal taxes, a significant increase from the $180 saved with the simplified method. Depending on your specific situation, you may choose between the simplified method, which offers ease but may limit deductions, and the actual expense method, ideal for those with higher expenses. Make sure to consult a tax professional to choose the best option for you.
During the tax-filing season, I found one major opportunity for a tax deduction for a client who was a freelance graphic designer who worked from their home office. While going through their income and expenses, I realised that the client had a dedicated workspace in residence. I asked about the usage of the space and ascertained that it met the requirement of exclusive business use to claim a home office deduction under Section 280A of the Internal Revenue Code (IRC). I then did all the necessary calculations with regard to the square footage involved of the workspace set aside—relevant while computing the allowable deduction under Section 280A regulations—and added in the utility and Internet costs, prorated for the use of that space. This detailed analysis greatly lowered my client's taxable income by reducing their tax basis through the home office deduction.